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The Federal Reserve's Dual Mandate

Policy

This chart plots the federal funds rate and the rate after adjusting for the annual change in the price index for personal consumption expenditures excluding food and energy prices. The FOMC, in setting monetary policy, aims to minimize the deviations of inflation from its longer-run goal and deviations of employment from its assessment of its maximum level. While the dual goals of the FOMC are generally complementary, they might occasionally call for different policy actions in the near term. In such cases, the FOMC follows a balanced approach in promoting the dual mandate, “taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.” The Committee’s policy decisions are often specified in terms of a target for the federal funds rate -- the interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight. This short-term interest rate serves as a benchmark for market rates of interest paid by consumers and businesses. By adjusting this rate, the Federal Reserve can promote financial conditions supportive of its dual mandate.